Bank reconciliation for small businesses, explained simply

Bank reconciliation sounds like something only accountants do. In practice it is a simple check: does what your books say about your bank account match what the bank says? If it does, you can trust your numbers. If it does not, you find out why while the details are still fresh.

This guide explains what reconciliation is, why it is worth doing every month, and exactly how to do it.

What bank reconciliation actually is

Your business keeps its own record of money moving in and out of each bank account: invoices paid, expenses recorded, transfers made. Your bank keeps its own record too, which you see as your statement.

Reconciling means comparing the two for a period (usually a month) and making sure every transaction appears in both, with the same amount. When everything is accounted for, your book balance and your statement balance agree, and the account is reconciled.

The two records rarely match perfectly before you start, for ordinary reasons:

• A check you wrote has not been cashed yet.
• A customer payment arrived on the last day of the month but the bank recorded it the next day.
• The bank charged a fee you have not recorded.
• A payment provider paid out an amount net of its fees.
• Someone entered an expense twice, or with a typo.

Reconciliation is how you find each of these and deal with it.

Why it is worth doing every month

• You catch mistakes early. A duplicated expense or a wrong amount is easy to fix a few weeks later, and very hard to fix a year later.
• You spot fraud and errors. Unfamiliar charges stand out when you look at every line.
• Your reports become reliable. A profit and loss report or balance sheet is only as good as the transactions behind it.
• Tax time gets easier. Your accountant receives books that already agree with the bank.
• You know your real cash position. Not just what the bank shows today, but what is still in transit.

What you need before you start

1. The bank statement for the period, including the opening and closing balances.
2. Your books for the same period, with income and expenses recorded.
3. The closing balance from your last reconciliation, which should equal this statement's opening balance.

If the opening balance does not match last month's reconciled closing balance, stop and fix that first. Something from a previous period has changed.

How to reconcile, step by step

1. Match the transactions

Go through the statement line by line. For each transaction, find the matching entry in your books and tick both off. Deposits match recorded payments received. Withdrawals match recorded expenses, bills paid, transfers and so on.

2. Record what is missing from your books

Some lines on the statement will not be in your books yet. Common ones:

• Bank fees and interest
• Automatic subscriptions you forgot to record
• Payment provider fees taken before a payout

Add each one with the correct category. These are real transactions; your books were just incomplete.

3. Note what is missing from the statement

Some entries in your books will not be on the statement yet. Usually these are timing differences: a check that has not cleared, or a deposit made on the last day. These are fine. They should appear on next month's statement, and you check them off then.

4. Investigate everything else

Anything that does not fit the above needs a closer look:

• Amounts that are close but not equal (a typo, or a fee deducted)
• Duplicates in your books
• Transactions recorded in the wrong bank account
• Charges you do not recognize

Fix the error in your books, or contact the bank or provider if the statement looks wrong.

5. Confirm the balances agree

Once everything is matched, your reconciled book balance should equal the statement's closing balance, after allowing for the items still in transit. When the difference is zero, you are done.

A worked example

Say your statement shows a closing balance of $8,420. Your books show $8,055. The difference is $365. Working through the steps:

After you record the $15 fee, your books show $8,040. Then adjust for timing: add back the uncashed check ($750) and subtract the payment in transit ($400). $8,040 plus $750 minus $400 is $8,390. That still leaves $30 unexplained, so you keep looking, and find an expense entered as $30 too high. Fix it, and the account reconciles.

The point is not the arithmetic. It is that every difference has a reason, and reconciliation makes you find it.

Reconciling in BooksBat

BooksBat is built on double entry bookkeeping, and reconciliation is part of its banking tools. The workflow follows the steps above:

1. Import your statement. Download it from your bank as a CSV, OFX, QFX or QBO file and import it. BooksBat does not use a live bank feed, so importing a file is how transactions arrive. Many people find a monthly import fits a monthly reconciliation well.
2. Match transactions. Imported lines are matched to invoices, payments and expenses you have already recorded.
3. Add bank rules. Set rules for regular charges, such as a monthly software subscription or bank fee, so they are categorized the same way every time.
4. Record transfers between your own accounts, so they are not mistaken for income or expenses.
5. Reconcile the account for the period and confirm the balances agree.

A few other features help keep reconciled months reliable:

• Payment fees post automatically. If customers pay through a connected provider like Stripe or PayPal, the fees post to your books, so payouts net of fees are easier to match. More on this in getting paid faster with online payments.
• Closing date with a password. Once a period is reconciled, set a closing date so earlier transactions cannot be changed without the password.
• Audit log. See who changed what, which helps when a reconciled balance unexpectedly moves.
• Accountant role. Invite your accountant with their own role instead of sharing your login.

The Free plan includes 2 bank accounts. Pro and Business add more users and companies; see pricing.

Mistakes to avoid

• Forcing it to balance. Adding a "miscellaneous" entry to make the numbers agree hides the real problem.
• Skipping months. Differences pile up and become harder to explain.
• Ignoring small amounts. A small unexplained difference can be two larger errors cancelling out.
• Changing reconciled periods. Editing old transactions breaks last month's balance. Lock periods once done.
• Reconciling only the main account. Credit cards and savings accounts need it too.

Where to start

Pick one account and one month, ideally last month. Get the statement, match each line, record what is missing, note what is in transit, and investigate the rest. The first time takes the longest. After that, it becomes a short monthly routine.

If your expense records need some tidying first, start with how to track expenses as a freelancer. When you are ready, create a free account and import last month's statement into BooksBat.